NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars in thousands except per share data)
1.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. All significant intercompany transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the company to make significant estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, which are readily convertible into cash, with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost approximates the first-in, first-out method. Substantially all inventories represent finished goods held for sale.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. The estimated useful lives for depreciation of buildings is generally
20
to
30
years, and the estimated useful lives of machinery and equipment is generally
three
to
ten
years. Leasehold improvements are amortized over the shorter of the term of the related lease or the life of the improvement. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If the carrying value of the asset can not be recovered from estimated future cash flows, undiscounted and without interest, the fair value of the asset is calculated using the present value of estimated net future cash flows. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference.
Software Development Costs
The company capitalizes certain internal and external costs incurred to acquire or create internal-use software. Capitalized software costs are amortized on a straight-line basis over the estimated useful life of the software, which is generally
three
to
twelve
years. At
December 31, 2017
and
2016
, the company had unamortized software development costs of
$535,203
and
$477,670
, respectively, which are included in "Machinery and equipment" in the company's consolidated balance sheets. During 2016, the company changed the useful life on its global ERP software from ten to twelve years. The impact of the change was not material.
Identifiable Intangible Assets
Amortization of definite-lived intangible assets is computed on the straight-line method over the estimated useful lives of the assets, while indefinite-lived intangible assets are not amortized. Identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The company also tests indefinite-lived intangible assets, consisting of acquired trade names, for impairment at least annually as of the first day of the fourth quarter. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference.
Investments
Investments are accounted for using the equity method if the investment provides the company the ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist if the company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee's
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Board of Directors, are considered in determining whether the equity method is appropriate. The company records its investments in equity method investees meeting these characteristics as "Investments in affiliated companies" in the company's consolidated balance sheets.
All other equity investments, which consist of investments for which the company does not possess the ability to exercise significant influence, are accounted for under the cost method or as available-for-sale, and are included in "Other assets" in the company's consolidated balance sheets. Under the cost method of accounting, investments are carried at cost and are adjusted only for other-than-temporary declines in realizable value and additional investments. During the year-ended December, 31,
2017
, the company recorded a net loss on investment of
$14,231
. The company accounts for available-for-sale investments at fair value, using quoted market prices, and the related holding gains and losses are included in "Accumulated other comprehensive income (loss)" in the shareholders' equity section in the company's consolidated balance sheets. The company assesses its long-term investments on an ongoing basis to determine whether declines in market value below cost are other-than-temporary. When the decline is determined to be other-than-temporary, the cost basis for the individual security is reduced and a loss is realized in the company's consolidated statement of operations in the period in which it occurs. The company makes such determination after considering the length of time and the extent to which the market value of the investment is less than its cost, the financial condition and operating results of the investee, and the company's intent and ability to retain the investment over time to potentially allow for any recovery in market value. In addition, the company assesses the following factors:
|
|
|
|
•
|
broad economic factors impacting the investee's industry;
|
|
|
|
|
•
|
publicly available forecasts for sales and earnings growth for the industry and investee; and
|
|
|
|
|
•
|
the cyclical nature of the investee's industry.
|
The company could incur an impairment charge in future periods if, among other factors, the investee's future earnings differ from currently available forecasts.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The company tests goodwill for impairment annually as of the first day of the fourth quarter and/or when an event occurs or circumstances change such that it is more likely than not that an impairment may exist. Examples of such events and circumstances that the company would consider include the following:
|
|
|
|
•
|
macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets;
|
|
|
|
|
•
|
industry and market considerations such as a deterioration in the environment in which the company operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for the company's products or services, or a regulatory or political development;
|
|
|
|
|
•
|
cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;
|
|
|
|
|
•
|
overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;
|
|
|
|
|
•
|
other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation;
|
|
|
|
|
•
|
events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit; and
|
|
|
|
|
•
|
a sustained decrease in share price (considered in both absolute terms and relative to peers).
|
Goodwill is tested at a level of reporting referred to as "the reporting unit." The company's reporting units are defined as each of the three regional businesses within the global components business segment, which are the Americas; Europe, the Middle East, and Africa ("EMEA"); and Asia/Pacific and each of the two regional businesses within the global ECS business segment, which are North America and EMEA.
An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary. The company has elected not to perform the qualitative assessment and performed the quantitative goodwill impairment test. The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit is less than its fair value, no impairment exists. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
The company estimates the fair value of a reporting unit using the income approach. For the purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The assumptions included in the income approach include forecasted revenues, gross profit margins, operating income margins, working capital cash flow, forecasted capital expenditures, perpetual growth rates, and long-term discount rates, among others, all of which require significant judgments by management. Actual results may differ from those assumed in the company's forecasts. The company also reconciles its discounted cash flow analysis to its current market capitalization allowing for a reasonable control premium. As of the first day of the fourth quarters of
2017
,
2016
, and
2015
, the company's annual impairment testing did not indicate impairment at any of the company's reporting units.
A decline in general economic conditions or global equity valuations could impact the judgments and assumptions about the fair value of the company's businesses, and the company could be required to record an impairment charge in the future, which could impact the company's consolidated balance sheet, as well as the company's consolidated statement of operations. If the company was required to recognize an impairment charge in the future, the charge would not impact the company's consolidated cash flows, current liquidity, capital resources, and covenants under its existing revolving credit facility, asset securitization program, and other outstanding borrowings.
As of
December 31, 2017
, the company has
$2.5 billion
of goodwill, of which approximately
$1.1 billion
,
$87.7 million
and
$61.2 million
was allocated to the Americas, EMEA, and Asia/Pacific reporting units within the global components business segment, respectively and
$795.8 million
and
$409.4 million
was allocated to the North America and EMEA reporting units within the global ECS business segment, respectively. As of the date of the company's latest impairment test, the fair value of the Americas, EMEA, and Asia/Pacific reporting units within the global components business segment and the fair value of the North America and EMEA reporting units within the global ECS business segment exceeded their carrying values by approximately
11%
,
126%
,
25%
,
538%
, and
159%
, respectively.
Foreign Currency Translation and Remeasurement
The assets and liabilities of international operations are translated at the exchange rates in effect at the balance sheet date. Revenue and expense accounts are translated at the monthly average exchange rates. Adjustments arising from the translation of the foreign currency financial statements of the company's international operations are reported as a component of "Accumulated other comprehensive loss" in the company's consolidated balance sheets.
For foreign currency remeasurement from each local currency into the appropriate functional currency, monetary assets and liabilities are remeasured to functional currencies using current exchange rates in effect at the balance sheet date. Gains or losses from these remeasurements were not significant and have been included in the company’s consolidated statements of operations. Non-monetary assets and liabilities are recorded at historical exchange rates.
Income Taxes
Income taxes are accounted for under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the tax bases of assets and liabilities and their financial reporting amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The carrying value of the company's deferred tax assets is dependent upon the company's ability to generate sufficient future taxable income in certain tax jurisdictions. Should the company determine that it is more likely than not that some portion or all of its deferred tax assets will not be realized, a valuation allowance to the deferred tax assets would be established in the period such determination was made.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
It is also the company's policy to provide for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the company's effective tax rate in a given financial statement period may be affected.
Net Income Per Share
Basic net income per share is computed by dividing net income attributable to shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.
Comprehensive Income
Comprehensive income consists of consolidated net income, foreign currency translation adjustment, unrealized gains or losses on post-retirement benefit plans, and unrealized gains or losses on investment securities and interest rate swaps designated as cash flow hedges. Unrealized gains or losses on investment securities and interest rate swaps are net of any reclassification adjustments for realized gains or losses included in consolidated net income. Foreign currency translation adjustments included in comprehensive income were not tax effected as investments in international affiliates are deemed to be permanent. All other comprehensive income items are net of related income taxes.
Stock-Based Compensation
The company records share-based payment awards exchanged for employee services at fair value on the date of grant and expenses the awards in the consolidated statements of operations over the requisite employee service period. Stock-based compensation expense includes an estimate for forfeitures. Stock-based compensation expense related to awards with a market or performance condition which cliff vest, are recognized over the vesting period on a straight line basis. Stock-based compensation awards with service conditions only are also recognized on a straight-line basis.
Segment Reporting
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The company's operations are classified into two reportable business segments: global components and global ECS.
Revenue Recognition
The company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred or services are rendered, the sales price is fixed or determinable, and collectibility is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates, tax, and returns, which historically have not been material.
A portion of the company's business involves shipments directly from its suppliers to its customers. In these transactions, the company is responsible for negotiating price both with the supplier and customer, payment to the supplier, establishing payment terms with the customer, product returns, and has risk of loss if the customer does not make payment. As the principal with the customer, the company recognizes the sale and cost of sale of the product upon receiving notification from the supplier that the product was shipped.
The company has certain business with select customers and suppliers that is accounted for on an agency basis (that is, the company recognizes the fees associated with serving as an agent in sales with no associated cost of sales). Generally, these transactions relate to the sale of supplier service contracts to customers where the company has no future obligation to perform under these contracts or the rendering of logistics services for the delivery of inventory for which the company does not assume the risks and rewards of ownership.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Shipping and Handling Costs
The company reports shipping and handling costs, primarily related to outbound freight, in the consolidated statements of operations as a component of selling, general, and administrative expenses. Shipping and handling costs included in selling, general, and administrative expenses totaled
$90,709
,
$79,257
, and
$77,399
in
2017
,
2016
, and
2015
, respectively.
Impact of Recently Issued Accounting Standards
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2017-12,
Derivatives and Hedging
(Topic 815) ("ASU No. 2017-12"). ASU No. 2017-12 simplifies certain aspects of hedge accounting and results in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements. ASU No. 2017-12 is effective for the company in the first quarter of 2019, with early adoption permitted, and is to be applied on a modified retrospective basis. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2017-12.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09,
Compensation - Stock Compensation
(Topic 718)("ASU No. 2017-09"). ASU No. 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Effective April 2, 2017, the company adopted the provisions of ASU No. 2017-09 on a prospective basis. The adoption of the provisions of ASU No. 2017-09 did not materially impact the company's consolidated financial position or results of operations.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07,
Compensation - Retirement Benefits
(Topic 715) ("ASU No. 2017-07"). ASU No. 2017-07 requires that the service cost component of pension expense be included in the same line item as other compensation costs arising from services rendered by employees, with the other components of pension expense being classified outside of a subtotal of income from operations. ASU No. 2017-07 is effective for the company in the first quarter of 2018 and is to be applied retrospectively for the presentation requirements and prospectively for the capitalization of the service cost component requirements. The adoption of the provisions of ASU No. 2017-07 is not expected to have a material impact on the company's consolidated financial position or results of operations.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04,
Intangibles - Goodwill and Other
(Topic 350) ("ASU No. 2017-04"). ASU No. 2017-04 eliminates step 2 from the annual goodwill impairment test. Effective January 1, 2017, the company adopted the provisions of ASU No. 2017-04 on a prospective basis. The adoption of the provisions of ASU No. 2017-04 would not materially impact the company's consolidated financial position or results of operations unless step 1 of the annual goodwill impairment test fails.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16,
Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory
(Topic 740) ("ASU No. 2016-16"). ASU No. 2016-16 clarifies the accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. Effective April 2, 2017, the company adopted the provisions of ASU No. 2016-16 on a modified retrospective basis. The adoption of the provisions of ASU No. 2016-16 did not materially impact the company's consolidated financial position or results of operations.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows
(Topic 230) ("ASU No. 2016-15"). ASU No. 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Effective January 1, 2017, the company adopted the provisions of ASU No. 2016-15 on a retrospective basis. The adoption of the provisions of ASU No. 2016-15 did not materially impact the company's consolidated financial position or results of operations.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments - Credit Losses
(Topic 326) ("ASU No. 2016-13"). ASU No. 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU No. 2016-13 is effective for the company in the first quarter of 2020, with early adoption permitted, and is to be applied using a modified retrospective approach. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Stock Compensation - Improvements to Employee Share-Based Payment Accounting
(Topic 718) ("ASU No. 2016-09"). ASU No. 2016-09 revises the accounting treatment for excess tax benefits, minimum statutory tax withholding requirements, and forfeitures related to share-based awards. Effective January 1,
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
2017, the company adopted the recognition of excess tax benefits and tax deficiencies on a prospective basis and reclassified excess tax benefits in the consolidated statements of cash flows on a retrospective basis. The company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The adoption of the provisions of ASU No. 2016-09 did not materially impact the company's consolidated financial position or results of operations.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
(Topic 842) ("ASU No. 2016-02"). ASU No. 2016-02 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets. Leases will be classified as either finance or operating, with classification affecting expense recognition in the income statement. ASU No. 2016-02 is effective for the company in the first quarter of 2019, with early adoption permitted, and is to be applied using a modified retrospective approach. While the company continues to evaluate the effects of adopting the provisions of ASU No. 2016-02, the company expects most existing operating lease commitments will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01,
Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities
(Topic 825) ("ASU No. 2016-01"). ASU No. 2016-01 revises the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires the change in fair value of many equity investments to be recognized in net income. ASU No. 2016-01 is effective for the company in the first quarter of 2018 and is to be applied prospectively. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-01.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(Topic 606) ("ASU No. 2014-09"). ASU No. 2014-09 supersedes all existing revenue recognition guidance. Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for the company in the first quarter of 2018. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption. In March, April, May, and December 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations
(Reporting Revenue Gross versus Net) ("ASU No. 2016-08"); ASU No. 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
("ASU No. 2016-10"); ASU No. 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients
("ASU No. 2016-12"); and ASU No. 2016-19,
Technical Corrections and Improvements
("ASU No. 2016-19"), respectively. ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12, and ASU No. 2016-19 provide supplemental adoption guidance and clarification to ASU No. 2014-09, and must be adopted concurrently with the adoption of ASU No. 2014-09.
In 2014, the company established an implementation team (“team”) and engaged external advisers to develop a multi-phase plan to assess the company’s business and contracts, as well as any changes to processes or systems to adopt the requirements of the new standard. The team has updated the assessment for new ASU updates and for newly acquired businesses. The company will adopt the provisions of ASU No. 2014-09 and related updates as of January 1, 2018 on a full retrospective basis. The company expects revenue recognition for its components business contracts to remain unchanged. However, the guidance is expected to change some net versus gross classifications on certain ECS business contracts, specifically software renewals, software bundles, antivirus software and services, and fixed-term software licenses. However, the impacts to consolidated sales and net income are not expected to be material. The company continues to identify the appropriate changes to its business processes, systems, and controls to support revenue recognition and disclosure under the new guidance.
Reclassification
Certain prior year amounts were reclassified to conform to the current year presentation.
2. Acquisitions
The company accounts for acquisitions using the acquisition method of accounting. The results of operations of acquisitions are included in the company's consolidated results from their respective dates of acquisition. The company allocates the purchase price of each acquisition to the tangible assets, liabilities, and identifiable intangible assets acquired based on their estimated fair values. In certain circumstances, a portion of purchase price may be contingent upon the achievement of certain operating results. The fair values assigned to identifiable intangible assets acquired and contingent consideration were determined primarily by using an income approach which was based on assumptions and estimates made by management. Significant assumptions utilized in the income approach were based on company specific information and projections, which are not observable in the market and
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
are thus considered Level 3 measurements by authoritative guidance (see Note 7). The excess of the purchase price over the fair value of the identified assets and liabilities has been recorded as goodwill. Any change in the estimated fair value of the net assets prior to the finalization of the allocation for acquisitions could change the amount of the purchase price allocable to goodwill. The company is not aware of any information that indicates the final purchase price allocations will differ materially from the preliminary estimates.
2017
Acquisitions
During 2017, the company acquired an additional
11.9%
of the noncontrolling interest common shares of Data Modul AG for
$23,350
, increasing the company's ownership interest in Data Modul to
69.2%
. The impact of this acquisition was not material to the company's consolidated financial position or results of operations.
During 2017, the company completed
two
acquisitions for
$3,628
, net of cash acquired. The impact of these acquisitions was not material to the company's consolidated financial position or results of operations. The pro forma impact of the 2017 acquisitions on the consolidated results of operations of the company for 2017, as though the acquisitions occurred on January 1, 2017, was also not material.
2016 Acquisitions
During 2016, the company completed
three
acquisitions for
$63,869
, net of cash acquired. The impact of these acquisitions was not material to the company's consolidated financial position or results of operations. The pro forma impact of the 2016 acquisitions on the consolidated results of operations of the company for 2016, as though the acquisitions occurred on January 1, 2016, was also not material.
2015 Acquisitions
On March 31, 2015, the company acquired immixGroup, Inc. ("immixGroup"), for a purchase price of
$280,454
, which included
$28,205
of cash acquired. immixGroup is a value-added provider supporting value-added resellers, solution providers, service providers, and other public sector channel partners with specialized resources to accelerate their government sales. immixGroup has operations in North America.
immixGroup sales of
$384,926
were included in the company's consolidated results of operations for 2015 after the date of the acquisition.
The following table summarizes the allocation of the net consideration paid to the fair value of the assets acquired and liabilities assumed for the immixGroup acquisition:
|
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
145,130
|
|
|
Other current assets
|
24,181
|
|
|
Property, plant, and equipment
|
1,569
|
|
|
Other assets
|
5,313
|
|
|
Identifiable intangible assets
|
46,400
|
|
|
Goodwill
|
183,840
|
|
|
Accounts payable
|
(136,921
|
)
|
|
Accrued expenses
|
(11,736
|
)
|
|
Other liabilities
|
(5,527
|
)
|
|
Cash consideration paid, net of cash acquired
|
$
|
252,249
|
|
In connection with the immixGroup acquisition, the company allocated
$44,000
to customer relationships with a useful life of
13
years and
$2,400
to amortizable trade name with a life of
five
years.
The goodwill related to the immixGroup acquisition was recorded in the company's global ECS business segment. The intangible assets related to the immixGroup acquisition are deductible for income tax purposes.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
During 2015, the company completed
nine
additional acquisitions for an aggregate purchase price of approximately
$263,341
, net of cash acquired,
i
nclusive of a
53.7%
acquisition of Data Modul AG, and an additional
3.6%
was acquired subsequent to the date of acquisition. The company also assumed
$84,487
in debt in connection with these acquisitions. The impact of these acquisitions was not material, individually or in the aggregate, to the company's consolidated financial position or results of operations.
The following table summarizes the company's consolidated results of operations for 2015, as well as the unaudited pro forma consolidated results of operations of the company, as though the 2015 acquisitions occurred on January 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2015
|
|
|
As Reported
|
|
Pro Forma
|
|
Sales
|
$
|
23,282,020
|
|
|
$
|
23,684,746
|
|
|
Net income attributable to shareholders
|
497,726
|
|
|
500,554
|
|
|
Net income per share:
|
|
|
|
|
Basic
|
$
|
5.26
|
|
|
$
|
5.29
|
|
|
Diluted
|
$
|
5.20
|
|
|
$
|
5.23
|
|
The unaudited pro forma consolidated results of operations do not purport to be indicative of the results obtained had these acquisitions occurred as of the beginning of 2015 or of those results that may be obtained in the future. Additionally, the above table does not reflect any anticipated cost savings or cross-selling opportunities expected to result from these acquisitions.
3. Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The company tests goodwill and other indefinite-lived intangible assets for impairment annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist.
As of the first day of the fourth quarters of
2017
,
2016
, and
2015
, the company's annual impairment testing did not result in any indicators of impairment of goodwill of companies acquired.
Goodwill of companies acquired, allocated to the company's business segments, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Components
|
|
Global ECS
|
|
Total
|
|
Balance as of December 31, 2015 (a)
|
|
$
|
1,230,832
|
|
|
$
|
1,138,000
|
|
|
$
|
2,368,832
|
|
|
Acquisitions
|
|
20,724
|
|
|
36,430
|
|
|
57,154
|
|
|
Foreign currency translation adjustment
|
|
(11,815
|
)
|
|
(21,951
|
)
|
|
(33,766
|
)
|
|
Balance as of December 31, 2016 (a)
|
|
$
|
1,239,741
|
|
|
$
|
1,152,479
|
|
|
$
|
2,392,220
|
|
|
Acquisitions
|
|
6,149
|
|
|
—
|
|
|
6,149
|
|
|
Impairment of assets held for sale
|
|
—
|
|
|
(7,922
|
)
|
|
(7,922
|
)
|
|
Foreign currency translation adjustment
|
|
18,979
|
|
|
60,621
|
|
|
79,600
|
|
|
Balance as of December 31, 2017 (b)
|
|
$
|
1,264,869
|
|
|
$
|
1,205,178
|
|
|
$
|
2,470,047
|
|
|
|
|
|
(a)
|
The total carrying value of goodwill of companies acquired as of December 31, 2016 and December 31, 2015 in the table above is reflected net of
$1,018,780
of accumulated impairment charges, of which
$716,925
was recorded in the global components business segment and
$301,855
was recorded in the global ECS business segment.
|
|
|
|
|
(b)
|
The total carrying value of goodwill of companies acquired as of December 31, 2017 in the table above is reflected net of
$1,026,702
of accumulated impairment charges, of which
$716,925
was recorded in the global components business segment and
$309,777
was recorded in the global ECS business segment.
|
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Intangible assets, net, are comprised of the following as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Non-amortizable trade names
|
indefinite
|
|
$
|
101,000
|
|
|
$
|
—
|
|
|
$
|
101,000
|
|
|
Customer relationships
|
10 years
|
|
440,167
|
|
|
(259,337
|
)
|
|
180,830
|
|
|
Developed technology
|
5 years
|
|
6,340
|
|
|
(3,043
|
)
|
|
3,297
|
|
|
Amortizable trade name
|
5 years
|
|
2,409
|
|
|
(1,321
|
)
|
|
1,088
|
|
|
|
|
|
$
|
549,916
|
|
|
$
|
(263,701
|
)
|
|
$
|
286,215
|
|
Intangible assets, net, are comprised of the following as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Non-amortizable trade names
|
indefinite
|
|
$
|
101,000
|
|
|
$
|
—
|
|
|
$
|
101,000
|
|
|
Customer relationships
|
10 years
|
|
476,176
|
|
|
(247,206
|
)
|
|
228,970
|
|
|
Developed technology
|
5 years
|
|
9,140
|
|
|
(4,435
|
)
|
|
4,705
|
|
|
Other intangible assets
|
(c)
|
|
6,721
|
|
|
(4,514
|
)
|
|
2,207
|
|
|
|
|
|
$
|
593,037
|
|
|
$
|
(256,155
|
)
|
|
$
|
336,882
|
|
|
|
|
|
(c)
|
Consists of non-competition agreements with useful lives ranging from
two
to
five
years.
|
Amortization expense related to identifiable intangible assets was
$50,071
,
$54,886
, and
$51,036
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively. Amortization expense for each of the years
2018
through
2022
is estimated to be approximately
$40,916
,
$34,497
,
$28,492
,
$22,534
, and
$20,462
, respectively, which does not include the 2018 subsequent acquisitions (see Note 19).
4.
Investments in Affiliated Companies
The company owns a
50%
interest in several joint ventures with Marubun Corporation (collectively "Marubun/Arrow") and several interests ranging from
43%
to
50%
in other joint ventures. These investments are accounted for using the equity method.
The following table presents the company's investment in the following joint ventures at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Marubun/Arrow
|
|
$
|
70,167
|
|
|
$
|
65,237
|
|
|
Other
|
|
18,180
|
|
|
23,164
|
|
|
|
|
$
|
88,347
|
|
|
$
|
88,401
|
|
The equity in earnings of affiliated companies for the years ended December 31 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Marubun/Arrow
|
|
$
|
6,842
|
|
|
$
|
7,629
|
|
|
$
|
6,212
|
|
|
Other
|
|
(3,418
|
)
|
|
(56
|
)
|
|
825
|
|
|
|
|
$
|
3,424
|
|
|
$
|
7,573
|
|
|
$
|
7,037
|
|
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Under the terms of various joint venture agreements, the company is required to pay its pro-rata share of the third party debt of the joint ventures in the event that the joint ventures are unable to meet their obligations. There were no outstanding borrowings under the third party debt agreements of the joint ventures as of
December 31, 2017
and 2016.
5. Accounts Receivable
Accounts receivable, net, consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Accounts receivable
|
|
$
|
8,227,383
|
|
|
$
|
6,798,943
|
|
|
Allowances for doubtful accounts
|
|
(56,291
|
)
|
|
(52,256
|
)
|
|
Accounts receivable, net
|
|
$
|
8,171,092
|
|
|
$
|
6,746,687
|
|
The company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowances for doubtful accounts are determined using a combination of factors, including the length of time the receivables are outstanding, the current business environment, and historical experience. The company also has notes receivables with certain customers. As of December 31, 2017, the company has one customer with a combined gross note and accounts receivable balance of approximately
$24,600
. The customer became delinquent on its repayment of the note during the fourth quarter of 2016. The company believes that it has adequately reserved for potential losses; however, it is possible that it could incur a loss in excess of the reserve.
6. Debt
Short-term borrowings, including current portion of long-term debt, consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
3.00% note, due 2018
|
|
$
|
299,857
|
|
|
$
|
—
|
|
|
Other short-term borrowings
|
|
56,949
|
|
|
93,827
|
|
|
|
|
$
|
356,806
|
|
|
$
|
93,827
|
|
Other short-term borrowings are primarily utilized to support working capital requirements. The weighted-average interest rate on these borrowings was
2.6%
and
2.4%
at December 31, 2017 and 2016, respectively.
Long-term debt consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Asset securitization program
|
|
$
|
490,000
|
|
|
$
|
460,000
|
|
|
6.875% senior debentures, due 2018
|
|
—
|
|
|
199,348
|
|
|
3.00% notes, due 2018
|
|
—
|
|
|
299,013
|
|
|
6.00% notes, due 2020
|
|
208,971
|
|
|
299,183
|
|
|
5.125% notes, due 2021
|
|
130,400
|
|
|
248,843
|
|
|
3.50% notes, due 2022
|
|
346,518
|
|
|
345,776
|
|
|
4.50% notes, due 2023
|
|
297,122
|
|
|
296,646
|
|
|
3.25% notes, due 2024
|
|
493,161
|
|
|
—
|
|
|
4.00% notes, due 2025
|
|
345,182
|
|
|
344,625
|
|
|
7.50% senior debentures, due 2027
|
|
109,694
|
|
|
198,514
|
|
|
3.875% notes, due 2028
|
|
493,563
|
|
|
—
|
|
|
Other obligations with various interest rates and due dates
|
|
18,434
|
|
|
4,386
|
|
|
|
|
$
|
2,933,045
|
|
|
$
|
2,696,334
|
|
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The
7.50%
senior debentures are not redeemable prior to their maturity. The
3.00%
notes,
6.00%
notes,
5.125%
notes,
3.50%
notes,
4.50%
notes,
3.25%
notes,
4.00%
, and
3.875%
notes may be called at the option of the company subject to "make whole" clauses.
The estimated fair market value of long-term debt at December 31, using quoted market prices, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
6.875% senior debentures, due 2018
|
|
$
|
—
|
|
|
$
|
212,500
|
|
|
3.00% notes, due 2018
|
|
300,500
|
|
|
303,500
|
|
|
6.00% notes, due 2020
|
|
224,000
|
|
|
325,500
|
|
|
5.125% notes, due 2021
|
|
139,000
|
|
|
265,500
|
|
|
3.50% notes, due 2022
|
|
355,000
|
|
|
349,500
|
|
|
4.50% notes, due 2023
|
|
315,500
|
|
|
305,500
|
|
|
3.25% notes, due 2024
|
|
491,000
|
|
|
—
|
|
|
4.00% notes, due 2025
|
|
356,500
|
|
|
345,000
|
|
|
7.50% senior debentures, due 2027
|
|
138,500
|
|
|
238,000
|
|
|
3.875% notes, due 2028
|
|
501,000
|
|
|
—
|
|
The carrying amount of the company's short-term borrowings in various countries, revolving credit facility, asset securitization program, and other obligations approximate their fair value.
The company has a revolving credit facility that may be used by the company for general corporate purposes including working capital in the ordinary course of business, letters of credit, repayment, prepayment or purchase of long-term indebtedness, acquisitions, and as support for the company's commercial paper program, as applicable.
In December 2016, the company amended its revolving credit facility and, among other things, increased its borrowing capacity from
$1,500,000
to
$1,800,000
and extended its term to mature in December 2021. Interest on borrowings under the revolving credit facility is calculated using a base rate or a euro currency rate plus a spread (
1.18%
at
December 31, 2017
), which is based on the company's credit ratings, for an effective interest rate of
2.61%
at
December 31, 2017
. The facility fee, which is based on the company's credit ratings, was
.20%
at
December 31, 2017
. There were no outstanding borrowings under the revolving credit facility at
December 31, 2017
and 2016.
The company has a commercial paper program and the maximum aggregate balance of commercial paper notes outstanding may not exceed the borrowing capacity of $
1,200,000
. The company had no outstanding borrowings under this program as of December 31, 2017 and 2016. The commercial paper program had an effective interest rate of
1.78%
for the year-ended December 31, 2017.
The company has an asset securitization program collateralized by accounts receivable of certain of its subsidiaries. In September 2016, the company amended its asset securitization program and, among other things, increased its borrowing capacity from
$900,000
to
$910,000
and extended its term to mature in September 2019. The asset securitization program is conducted through Arrow Electronics Funding Corporation ("AFC"), a wholly-owned, bankruptcy remote subsidiary. The asset securitization program does not qualify for sale treatment. Accordingly, the accounts receivable and related debt obligation remain on the company's consolidated balance sheets. Interest on borrowings is calculated using a base rate or a commercial paper rate plus a spread (
.40%
at
December 31, 2017
), which is based on the company's credit ratings, for an effective interest rate of
1.91%
at
December 31, 2017
. The facility fee is
.40%
.
At
December 31, 2017
and
2016
, the company had
$490,000
and
$460,000
, respectively, in outstanding borrowings under the asset securitization program, which was included in "Long-term debt" in the company's consolidated balance sheets, and total collateralized accounts receivable of approximately
$2,270,500
and
$2,045,464
, respectively, were held by AFC and were included in "Accounts receivable, net" in the company's consolidated balance sheets. Any accounts receivable held by AFC would likely not be available to other creditors of the company in the event of bankruptcy or insolvency proceedings before repayment of any outstanding borrowings under the asset securitization program.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Both the revolving credit facility and asset securitization program include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels. The company was in compliance with all covenants as of
December 31, 2017
and is currently not aware of any events that would cause non-compliance with any covenants in the future.
The company has a
$100,000
uncommitted line of credit. There were no outstanding borrowings under the uncommitted line of credit at
December 31, 2017
and
2016
.
During 2017, the company completed the sale of
$500,000
principal amount of
3.875%
notes due in 2028. The net proceeds of the offering of
$494,625
were used to redeem the company's
6.875%
senior debenture due June 2018 and refinance a portion of the company's
6.00%
notes due April 2020,
5.125%
notes due March 2021, and
7.50%
notes due January 2027. The company recorded a loss on extinguishment of debt of
$59,545
for 2017.
During 2017, the company completed the sale of
$500,000
principal amount of
3.25%
notes due in 2024. The net proceeds of the offering of
$493,810
are expected to be used to redeem the company's debt obligations and for general corporate purposes.
During 2015, the company completed the sale of
$350,000
principal amount of
3.50%
notes due in 2022 and
$350,000
principal amount of
4.00%
notes due in 2025. The net proceeds of the offering of
$688,162
were used to refinance the company's
3.375%
notes due November 2015 and for general corporate purposes.
During 2015, the company redeemed
$250,000
principal amount of its
3.375%
notes due November 2015. The related loss on the redemption for 2015 was
$2,943
and was recognized as a loss on extinguishment of debt in the company's consolidated statements of operations.
Annual payments of borrowings during each of the years
2018
through
2022
are
$355,588
,
$499,371
,
$213,432
,
$133,384
, and
$346,804
, respectively, and
$1,738,723
for all years thereafter.
Interest and other financing expense, net, includes interest and dividend income of
$32,599
,
$18,680
, and
$6,301
in
2017
,
2016
, and
2015
, respectively. Interest paid, net of interest and dividend income, amounted to
$156,974
,
$141,816
, and
$133,390
in
2017
,
2016
, and
2015
, respectively.
7. Financial Instruments Measured at Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
|
|
|
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
|
|
Level 2
|
Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
|
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
|
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The following table presents assets (liabilities) measured at fair value on a recurring basis at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash equivalents (a)
|
|
Cash and cash equivalents / other assets
|
|
$
|
3,267
|
|
|
$
|
286,671
|
|
|
$
|
—
|
|
|
$
|
289,938
|
|
|
Available-for-sale securities
|
|
Other assets
|
|
52,683
|
|
|
—
|
|
|
—
|
|
|
52,683
|
|
|
Interest rate swaps
|
|
Other liabilities
|
|
—
|
|
|
(149
|
)
|
|
—
|
|
|
(149
|
)
|
|
Foreign exchange contracts
|
|
Other current assets
|
|
—
|
|
|
5,499
|
|
|
—
|
|
|
5,499
|
|
|
Foreign exchange contracts
|
|
Accrued expenses
|
|
—
|
|
|
(8,581
|
)
|
|
—
|
|
|
(8,581
|
)
|
|
Contingent consideration
|
|
Accrued expenses
|
|
—
|
|
|
—
|
|
|
(3,176
|
)
|
|
(3,176
|
)
|
|
|
|
|
|
$
|
55,950
|
|
|
$
|
283,440
|
|
|
$
|
(3,176
|
)
|
|
$
|
336,214
|
|
|
|
|
|
(a)
|
Cash equivalents include
$286,671
invested in certificates of deposit, with an original maturity of less than three months, held in anticipation of our acquisition of eInfochips, which closed in January 2018 (see Note 19).
|
The following table presents assets (liabilities) measured at fair value on a recurring basis at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash equivalents
|
|
Other assets
|
|
$
|
2,660
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,660
|
|
|
Available-for-sale securities
|
|
Other assets
|
|
37,915
|
|
|
—
|
|
|
—
|
|
|
37,915
|
|
|
Interest rate swaps
|
|
Other assets
|
|
—
|
|
|
152
|
|
|
—
|
|
|
152
|
|
|
Foreign exchange contracts
|
|
Other current assets
|
|
—
|
|
|
4,685
|
|
|
—
|
|
|
4,685
|
|
|
Foreign exchange contracts
|
|
Accrued expenses
|
|
—
|
|
|
(3,444
|
)
|
|
—
|
|
|
(3,444
|
)
|
|
Contingent consideration
|
|
Accrued expenses
|
|
—
|
|
|
—
|
|
|
(4,027
|
)
|
|
(4,027
|
)
|
|
|
|
|
|
$
|
40,575
|
|
|
$
|
1,393
|
|
|
$
|
(4,027
|
)
|
|
$
|
37,941
|
|
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to goodwill, identifiable intangible assets, and assets held for sale (see Notes 2, 3, and 18). The company tests these assets for impairment if indicators of potential impairment exist or at least annually if indefinite lived.
During
2017
,
2016
, and
2015
there were no transfers of assets (liabilities) measured at fair value between the three levels of the fair value hierarchy.
Available-For-Sale Securities
The company has an
8.4%
equity ownership interest in Marubun Corporation ("Marubun") and a portfolio of mutual funds with quoted market prices, all of which are accounted for as available-for-sale securities.
The fair value of the company's available-for-sale securities is as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
Marubun
|
|
Mutual Funds
|
|
Marubun
|
|
Mutual Funds
|
|
Cost basis
|
$
|
10,016
|
|
|
$
|
18,454
|
|
|
$
|
10,016
|
|
|
$
|
18,097
|
|
|
Unrealized holding
gain
|
14,157
|
|
|
10,056
|
|
|
3,806
|
|
|
5,996
|
|
|
Fair value
|
$
|
24,173
|
|
|
$
|
28,510
|
|
|
$
|
13,822
|
|
|
$
|
24,093
|
|
The unrealized holding gains or losses are included in "Accumulated other comprehensive loss" in the shareholders' equity section in the company's consolidated balance sheets.
Derivative Instruments
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The company uses various financial instruments, including derivative instruments, for purposes other than trading. Certain derivative instruments are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. Derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings.
Interest Rate Swaps
The company occasionally enters into interest rate swap transactions that convert certain fixed-rate debt to variable-rate debt or variable-rate debt to fixed-rate debt in order to manage its targeted mix of fixed- and floating-rate debt. The company uses the hypothetical derivative method to assess the effectiveness of its interest rate swaps designated as fair value hedges on a quarterly basis. The effective portion of the change in the fair value of interest rate swaps designated as fair value hedges is recorded as a change to the carrying value of the related hedged debt, and the effective portion of the change in fair value of interest rate swaps designated as cash flow hedges is recorded in the shareholders' equity section in the company's consolidated balance sheets in "Accumulated other comprehensive loss." The ineffective portion of the interest rate swaps, if any, is recorded in "Interest and other financing expense, net" in the company's consolidated statements of operations. As of
December 31, 2017
, all outstanding interest rate swaps were designated as fair value hedges.
The terms of outstanding interest rate swap contracts at
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Notional Amount
|
|
Interest rate due from counterparty
|
|
Interest rate due to counterparty
|
|
April 2020
|
|
50,000
|
|
6.000%
|
|
6 mo. USD LIBOR + 3.896
|
Foreign Exchange Contracts
The company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. The company’s transactions in its foreign operations are denominated primarily in the following currencies: Euro, Chinese Renminbi, British Pound, Taiwan Dollar, and Australian Dollar. The company enters into foreign exchange forward, option, or swap contracts (collectively, the "foreign exchange contracts") to mitigate the impact of changes in foreign currency exchange rates. These contracts are executed to facilitate the hedging of foreign currency exposures resulting from inventory purchases and sales and generally have terms of no more than six months. Gains or losses on these contracts are deferred and recognized when the underlying future purchase or sale is recognized or when the corresponding asset or liability is revalued. The company does not enter into foreign exchange contracts for trading purposes. The risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the company minimizes by limiting its counterparties to major financial institutions. The fair value of the foreign exchange contracts are estimated using market quotes. The notional amount of the foreign exchange contracts at
December 31, 2017
and
2016
was
$504,084
and
$460,233
, respectively.
Gains and losses related to non-designated foreign currency exchange contracts are recorded in "Cost of sales" in the company's consolidated statements of operations. Gains and losses related to designated foreign currency exchange contracts are recorded in "Cost of sales", "Selling, general, and administrative expenses", and "Interest and other financing expense, net" based upon the nature of the underlying transaction, in the company's consolidated statements of operations and were not material for 2017, 2016, and 2015.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The effects of derivative instruments on the company's consolidated statements of operations and other comprehensive income are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Gain (Loss) Recognized in Income
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(20,877
|
)
|
|
$
|
1,535
|
|
|
$
|
4,755
|
|
|
Interest rate swaps
|
|
(831
|
)
|
|
(608
|
)
|
|
(523
|
)
|
|
Total
|
|
$
|
(21,708
|
)
|
|
$
|
927
|
|
|
$
|
4,232
|
|
|
Gain (Loss) Recognized in Other Comprehensive Income before reclassifications
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(2,022
|
)
|
|
$
|
(153
|
)
|
|
$
|
(1,001
|
)
|
|
Interest rate swaps
|
|
$
|
(4,672
|
)
|
|
$
|
—
|
|
|
$
|
827
|
|
Other
The carrying amount of cash and cash equivalents, accounts receivable, net, and accounts payable approximate their fair value due to the short maturities of these financial instruments.
8. Income Taxes
The provision for income taxes for the years ended December 31 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
119,883
|
|
|
$
|
45,314
|
|
|
$
|
82,532
|
|
|
State
|
(6,156
|
)
|
|
7,022
|
|
|
18,022
|
|
|
International
|
134,987
|
|
|
110,208
|
|
|
85,310
|
|
|
|
248,714
|
|
|
162,544
|
|
|
185,864
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
31,168
|
|
|
29,973
|
|
|
12,127
|
|
|
State
|
13,534
|
|
|
7,161
|
|
|
(1,828
|
)
|
|
International
|
(6,290
|
)
|
|
(9,004
|
)
|
|
(4,466
|
)
|
|
|
38,412
|
|
|
28,130
|
|
|
5,833
|
|
|
|
$
|
287,126
|
|
|
$
|
190,674
|
|
|
$
|
191,697
|
|
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The principal causes of the difference between the U.S. federal statutory tax rate of
35%
and effective income tax rates for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
United States
|
$
|
115,850
|
|
|
$
|
235,256
|
|
|
$
|
281,579
|
|
|
International
|
578,438
|
|
|
480,141
|
|
|
410,604
|
|
|
Income before income taxes
|
$
|
694,288
|
|
|
$
|
715,397
|
|
|
$
|
692,183
|
|
|
|
|
|
|
|
|
|
Provision at statutory tax rate
|
$
|
243,001
|
|
|
$
|
250,389
|
|
|
$
|
242,264
|
|
|
State taxes, net of federal benefit
|
5,184
|
|
|
9,219
|
|
|
10,526
|
|
|
International effective tax rate differential
|
(88,444
|
)
|
|
(64,002
|
)
|
|
(56,132
|
)
|
|
Change in valuation allowance
|
1,408
|
|
|
7,174
|
|
|
(205
|
)
|
|
Other non-deductible expenses
|
12,700
|
|
|
3,516
|
|
|
3,530
|
|
|
Changes in tax accruals
|
(7,973
|
)
|
|
(3,679
|
)
|
|
(7,423
|
)
|
|
Tax credits
|
(8,170
|
)
|
|
(14,510
|
)
|
|
—
|
|
|
Tax Act's transition tax (a)
|
196,010
|
|
|
—
|
|
|
—
|
|
|
Tax Act's impact on deferred taxes (b)
|
(71,261
|
)
|
|
—
|
|
|
—
|
|
|
Other
|
4,671
|
|
|
2,567
|
|
|
(863
|
)
|
|
Provision for income taxes
|
$
|
287,126
|
|
|
$
|
190,674
|
|
|
$
|
191,697
|
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs (e.g., interest expense), among other things.
Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 requires that the company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. Accordingly, the company recorded the following reasonable estimates of the tax impact in its earnings for the year ended December 31, 2017.
|
|
|
|
(a)
|
For the year ended December 31, 2017, the company accrued a reasonable estimate of
$196,010
of tax expense for the Tax Act’s one-time transition tax on the foreign subsidiaries’ accumulated, unremitted earnings going back to 1986.
|
|
|
|
|
(b)
|
For the year ended December 31, 2017, the company accrued
$71,261
in provisional tax benefit related to the net change in deferred tax liabilities stemming from the Tax Act’s reduction of the U.S. federal tax rate from 35% to 21%, and disallowance of certain incentive based compensation tax deductibility under Internal Revenue Code Section 162(m).
|
The Tax Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its subsidiaries. The company will be subject to the GILTI and BEAT provisions effective beginning January 1, 2018 and is in the process of analyzing their effects, including how to account for the GILTI provision from an accounting policy standpoint.
The final impact on the company from the Tax Act’s transition tax legislation may differ from the aforementioned reasonable estimate of
$196,010
due to the complexity of calculating and supporting with primary evidence such U.S. tax attributes as accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years back to 1986. Such differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition tax's reasonable estimate.
Pursuant to the SAB118, the company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Accordingly, the company accrued the transition tax of
$196,010
and a tax
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
benefit related to the net change in deferred tax liabilities of
$71,261
for 2017 based on the reasonable estimate guidance. The company will continue to calculate the impact of the U.S. Tax Act and will record any resulting tax adjustments during 2018. Additionally, the company will elect to pay the transition tax in installments over the period of 8 years, pursuant to the guidance of the new Internal Revenue Code Section 965.
The company evaluates and establishes liabilities for uncertain tax positions that may be challenged by local tax authorities and that may not be fully sustained, despite the belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitations. Such adjustments are reflected in the tax provision as appropriate.
At
December 31, 2017
, the company had a liability for unrecognized tax position of
$24,361
. The timing of the resolution of these uncertain tax positions is dependent on the tax authorities' income tax examination processes. Material changes are not expected, however, it is possible that the amount of unrecognized tax benefits with respect to uncertain tax positions could increase or decrease during 2018. Currently, the company is unable to make a reasonable estimate of when tax cash settlement would occur and how it would impact the effective tax rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Balance at beginning of year
|
$
|
31,534
|
|
|
$
|
36,935
|
|
|
$
|
44,701
|
|
|
Additions based on tax positions taken during a prior period
|
2,342
|
|
|
2,356
|
|
|
2,568
|
|
|
Reductions based on tax positions taken during a prior period
|
(1,242
|
)
|
|
(6,305
|
)
|
|
(9,482
|
)
|
|
Additions based on tax positions taken during the current period
|
6,543
|
|
|
3,935
|
|
|
8,440
|
|
|
Reductions related to settlement of tax matters
|
(2,921
|
)
|
|
(2,795
|
)
|
|
(4,143
|
)
|
|
Reductions related to a lapse of applicable statute of limitations
|
(11,895
|
)
|
|
(2,592
|
)
|
|
(5,149
|
)
|
|
Balance at end of year
|
$
|
24,361
|
|
|
$
|
31,534
|
|
|
$
|
36,935
|
|
Interest costs related to unrecognized tax benefits are classified as a component of "Interest and other financing expense, net" in the company's consolidated statements of operations. In
2017
,
2016
, and
2015
, the company recognized
$(2,792)
,
$(1,946)
, and
$(3,247)
, respectively, of interest expense related to unrecognized tax benefits. At
December 31, 2017
and
2016
, the company had a liability for the payment of interest of
$3,301
and
$6,881
, respectively, related to unrecognized tax benefits.
In many cases the company's uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction, as of
December 31, 2017
:
|
|
|
|
|
|
|
United States - Federal
|
|
2014 - present
|
|
United States - States
|
|
2007 - present
|
|
Germany (c)
|
|
2010 - present
|
|
Hong Kong
|
|
2010 - present
|
|
Italy (c)
|
|
2012 - present
|
|
Sweden
|
|
2012 - present
|
|
United Kingdom
|
|
2015 - present
|
(c) Includes federal as well as local jurisdictions.
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated balance sheets. These temporary differences result in taxable or deductible amounts in future years.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The deferred tax assets and liabilities consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
$
|
113,327
|
|
|
$
|
102,710
|
|
|
Inventory adjustments
|
42,376
|
|
|
56,890
|
|
|
Allowance for doubtful accounts
|
12,368
|
|
|
14,526
|
|
|
Accrued expenses
|
28,229
|
|
|
40,179
|
|
|
Interest carryforward
|
15,964
|
|
|
19,073
|
|
|
Stock-based compensation awards
|
12,982
|
|
|
24,505
|
|
|
Other comprehensive income items
|
—
|
|
|
10,859
|
|
|
Integration and restructuring
|
6,726
|
|
|
2,970
|
|
|
Other
|
17,015
|
|
|
17,830
|
|
|
|
248,987
|
|
|
289,542
|
|
|
Valuation allowance
|
(13,915
|
)
|
|
(15,323
|
)
|
|
Total deferred tax assets
|
$
|
235,072
|
|
|
$
|
274,219
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Goodwill
|
$
|
(109,994
|
)
|
|
$
|
(142,541
|
)
|
|
Depreciation
|
(116,725
|
)
|
|
(94,838
|
)
|
|
Intangible assets
|
(18,760
|
)
|
|
(21,118
|
)
|
|
Other comprehensive income items
|
(5,542
|
)
|
|
—
|
|
|
Total deferred tax liabilities
|
$
|
(251,021
|
)
|
|
$
|
(258,497
|
)
|
|
Total net deferred tax assets (liabilities)
|
$
|
(15,949
|
)
|
|
$
|
15,722
|
|
At
December 31, 2017
, the company had international tax loss carryforwards of approximately
$327,568
, of which
$9,787
have expiration dates ranging from 2018 to 2035, and the remaining
$317,781
have no expiration date. Deferred tax assets related to these international tax loss carryforwards were
$105,534
with a corresponding valuation allowance of
$6,624
.
At
December 31, 2017
, the company also had the U.S. Federal net operating loss carryforwards of approximately
$11,940
, which relate to acquired subsidiaries. These U.S. Federal net operating losses expire in various years beginning after 2027. The company has an agreement with the sellers of an acquired business to reimburse them for the company's utilization of certain U.S. Federal net operating loss carryforwards. Deferred tax assets include federal net operating loss carryforwards. The company also has certain state net operating loss carryforwards with corresponding valuation allowances.
Valuation allowances reflect the deferred tax benefits that management is uncertain of the ability to utilize in the future.
At
December 31, 2017
, cumulative undistributed earnings of foreign subsidiaries were approximately
$3,200,000
, for which no U.S. deferred income taxes were provided for, with the exception of the Tax Act's transition tax, due to the company's assertion to permanently reinvest such earnings in international operations.
Income taxes paid, net of income taxes refunded, amounted to
$231,183
,
$190,109
, and
$182,668
in
2017
,
2016
, and
2015
, respectively.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
9. Restructuring, Integration, and Other Charges
In
2017
,
2016
, and
2015
, the company recorded restructuring, integration, and other charges of
$91,294
,
$73,602
, and
$68,765
, respectively.
The following table presents the components of the restructuring, integration, and other charges for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Restructuring and integration charge - current period actions
|
|
$
|
46,816
|
|
|
$
|
32,894
|
|
|
$
|
39,119
|
|
|
Restructuring and integration charges - actions taken in prior periods
|
|
6,191
|
|
|
3,611
|
|
|
4,084
|
|
|
Other charges
|
|
38,287
|
|
|
37,097
|
|
|
25,562
|
|
|
|
|
$
|
91,294
|
|
|
$
|
73,602
|
|
|
$
|
68,765
|
|
2017
Restructuring and Integration Charge
The following table presents the components of the
2017
restructuring and integration charge of
$46,816
and activity in the related restructuring and integration accrual for
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
Costs
|
|
Facilities Costs
|
|
Other
|
|
Total
|
|
Restructuring and integration charge
|
|
$
|
37,615
|
|
|
$
|
8,192
|
|
|
$
|
1,009
|
|
|
$
|
46,816
|
|
|
Payments
|
|
(23,384
|
)
|
|
(3,494
|
)
|
|
(926
|
)
|
|
(27,804
|
)
|
|
Foreign currency translation
|
|
1,045
|
|
|
176
|
|
|
17
|
|
|
1,238
|
|
|
Balance as of December 31, 2017
|
|
$
|
15,276
|
|
|
$
|
4,874
|
|
|
$
|
100
|
|
|
$
|
20,250
|
|
These restructuring initiatives are due to the company's continued efforts to lower cost and drive operational efficiency. Integration costs are primarily related to the integration of acquired businesses within the company's pre-existing business and the consolidation of certain operations.
2016
Restructuring and Integration Charge
The following table presents the components of the
2016
restructuring and integration charge of
$32,894
and activity in the related restructuring and integration accrual for
2016
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
Costs
|
|
Facilities Costs
|
|
Other
|
|
Total
|
|
Restructuring and integration charge
|
|
$
|
25,763
|
|
|
$
|
5,786
|
|
|
$
|
1,345
|
|
|
$
|
32,894
|
|
|
Payments
|
|
(13,730
|
)
|
|
(1,974
|
)
|
|
(1,132
|
)
|
|
(16,836
|
)
|
|
Foreign currency translation
|
|
(339
|
)
|
|
(19
|
)
|
|
103
|
|
|
(255
|
)
|
|
Balance as of December 31, 2016
|
|
11,694
|
|
|
3,793
|
|
|
316
|
|
|
15,803
|
|
|
Restructuring and integration charge (credit)
|
|
6,498
|
|
|
(525
|
)
|
|
(196
|
)
|
|
5,777
|
|
|
Payments
|
|
(12,229
|
)
|
|
(2,767
|
)
|
|
(119
|
)
|
|
(15,115
|
)
|
|
Foreign currency translation
|
|
459
|
|
|
213
|
|
|
18
|
|
|
690
|
|
|
Balance as of December 31, 2017
|
|
$
|
6,422
|
|
|
$
|
714
|
|
|
$
|
19
|
|
|
$
|
7,155
|
|
These restructuring initiatives are due to the company's continued efforts to lower cost and drive operational efficiency. Integration costs are primarily related to the integration of acquired businesses within the company's pre-existing business and the consolidation of certain operations.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Restructuring and Integration Accruals Related to Actions Taken Prior to
2016
Included in restructuring, integration, and other charges for
2017
are restructuring and integration charges of
$414
related to restructuring and integration actions taken prior to
2016
. The restructuring and integration charge (credits) includes adjustments to personnel costs of
$750
, facilities costs of
$(316)
, and other costs of
$(20)
. The restructuring and integration accruals related to actions taken prior to
2016
of
$3,175
, include accruals for personnel costs of
$2,523
, accruals for facilities costs of
$524
, and accrual for other costs of
$128
.
Restructuring and Integration Accrual Summary
In summary, the restructuring and integration accruals aggregate
$30,580
at
December 31, 2017
, all of which are expected to be spent in cash, and are expected to be utilized as follows:
|
|
|
|
•
|
The accruals for personnel costs totaling
$24,221
relate to the termination of personnel that have scheduled payouts of
$20,599
in
2018
,
$2,576
in
2019
,
$1,005
in
2020
, and
$41
in
2021
.
|
|
|
|
|
•
|
The accruals for facilities totaling
$6,112
relate to vacated leased properties that have scheduled payments of
$1,730
in
2018
,
$669
in
2019
,
$698
in
2020
,
$451
in
2021
,
$327
in
2022
, and
$2,237
thereafter.
|
|
|
|
|
•
|
Other accruals of
$247
are expected to be spent within one year.
|
Other Charges
Included in restructuring, integration, and other charges for 2017 are other expenses of
$38,287
. The following items represent other charges and credits recorded to restructuring, integration, and other charges for the year ended December 31, 2017:
|
|
|
|
•
|
acquisition related charges for 2017 of
$7,658
related to contingent consideration for acquisitions completed in prior years which were conditional upon the financial performance of the acquired companies and the continued employment of the selling shareholders, as well as professional and other fees directly related to recent acquisition activity;
|
|
|
|
|
•
|
an additional expense of
$2,071
to increase its accrual for the Wyle Laboratories ("Wyle") environmental obligation (see Note 15);
|
|
|
|
|
•
|
a net loss on real estate transactions of
$3,144
; and
|
|
|
|
|
•
|
a settlement expense of
$16,706
relating to settling a portion of the company's Wyle defined benefit plan (see Note 13).
|
Included in restructuring, integration, and other charges for 2016 are other expenses of
$37,097
. The following items represent other charges and credits recorded to restructuring, integration, and other charges for the year ended December 31, 2016:
|
|
|
|
•
|
a settlement expense of
$12,211
relating to the company's adoption of an amendment to its Wyle defined benefit plan (see Note 13);
|
|
|
|
|
•
|
an additional expense of
$11,771
to increase its accrual for the Wyle environmental obligation (see Note 15);
|
|
|
|
|
•
|
acquisition related charges for 2016 of
$8,705
related to contingent consideration for acquisitions completed in prior years, which were conditional upon the financial performance of the acquired companies and the continued employment of the selling shareholders, as well as professional and other fees directly related to recent acquisition activity;
|
|
|
|
|
•
|
a fraud loss, net of insurance recoveries and incremental expenses, of
$4,329
; and
|
|
|
|
|
•
|
a credit related to the release of a
$2,376
legal reserve.
|
In January 2016, the company determined that it was the target of criminal fraud by persons impersonating a company executive, which resulted in unauthorized transfers of cash from a company account in Europe to outside bank accounts in Asia. Legal actions by the company and law enforcement are ongoing. The information gathered by the company indicates that this was an isolated event not associated with a security breach or loss of data. Additionally, no officers or employees of the company were involved in the fraud.
Included in restructuring, integration, and other charges for 2015 are acquisition related expenses of
$19,565
, primarily consisting of charges related to contingent consideration for acquisitions completed in prior years which were conditional upon the financial performance of the acquired companies and the continued employment of the selling shareholders, as well as professional and other fees directly related to recent acquisition activity.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
10. Shareholders' Equity
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in Accumulated other comprehensive income (loss), excluding noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment and Other
|
|
Unrealized Gain (loss) on Investment Securities, Net
|
|
Unrealized Gain (Loss) on Interest Rate Swaps Designated as Cash Flow Hedges, Net
|
|
Employee Benefit Plan Items, Net
|
|
Total
|
|
Balance as of December 31, 2015
|
|
$
|
(241,326
|
)
|
|
$
|
8,533
|
|
|
$
|
(3,320
|
)
|
|
$
|
(48,593
|
)
|
|
$
|
(284,706
|
)
|
|
Other comprehensive income (loss) before reclassifications (a)
|
|
(103,254
|
)
|
|
(2,439
|
)
|
|
—
|
|
|
(737
|
)
|
|
(106,430
|
)
|
|
Amounts reclassified into income (loss)
|
|
(3,976
|
)
|
|
—
|
|
|
373
|
|
|
10,885
|
|
|
7,282
|
|
|
Net change in accumulated other comprehensive income (loss) for the year ended December 31, 2016
|
|
(107,230
|
)
|
|
(2,439
|
)
|
|
373
|
|
|
10,148
|
|
|
(99,148
|
)
|
|
Balance as of December 31, 2016
|
|
(348,556
|
)
|
|
6,094
|
|
|
(2,947
|
)
|
|
(38,445
|
)
|
|
(383,854
|
)
|
|
Other comprehensive income (loss) before reclassifications (a)
|
|
253,259
|
|
|
8,852
|
|
|
(2,870
|
)
|
|
(3,812
|
)
|
|
255,429
|
|
|
Amounts reclassified into income (loss)
|
|
(9,756
|
)
|
|
—
|
|
|
511
|
|
|
12,665
|
|
|
3,420
|
|
|
Net change in accumulated other comprehensive income
(loss)
for the year ended December 31, 2017
|
|
243,503
|
|
|
8,852
|
|
|
(2,359
|
)
|
|
8,853
|
|
|
258,849
|
|
|
Balance as of December 31, 2017
|
|
$
|
(105,053
|
)
|
|
$
|
14,946
|
|
|
$
|
(5,306
|
)
|
|
$
|
(29,592
|
)
|
|
$
|
(125,005
|
)
|
|
|
|
|
(a)
|
Foreign currency translation adjustment includes intra-entity foreign currency transactions that are of a long-term investment nature of
$(64,610)
and
$(12,852)
for
2017
and
2016
, respectively.
|
Common Stock Outstanding Activity
The following table sets forth the activity in the number of shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued
|
|
Treasury Stock
|
|
Common Stock Outstanding
|
|
Common stock outstanding at December 31, 2014
|
|
125,424
|
|
|
29,529
|
|
|
95,895
|
|
|
Shares issued for stock-based compensation awards
|
|
—
|
|
|
(1,155
|
)
|
|
1,155
|
|
|
Repurchases of common stock
|
|
—
|
|
|
6,127
|
|
|
(6,127
|
)
|
|
Common stock outstanding at December 31, 2015
|
|
125,424
|
|
|
34,501
|
|
|
90,923
|
|
|
Shares issued for stock-based compensation awards
|
|
—
|
|
|
(1,372
|
)
|
|
1,372
|
|
|
Repurchases of common stock
|
|
—
|
|
|
3,382
|
|
|
(3,382
|
)
|
|
Common stock outstanding at December 31, 2016
|
|
125,424
|
|
|
36,511
|
|
|
88,913
|
|
|
Shares issued for stock-based compensation awards
|
|
—
|
|
|
(1,097
|
)
|
|
1,097
|
|
|
Repurchases of common stock
|
|
—
|
|
|
2,319
|
|
|
(2,319
|
)
|
|
Common stock outstanding at December 31, 2017
|
|
125,424
|
|
|
37,733
|
|
|
87,691
|
|
The company has
2,000,000
authorized shares of serial preferred stock with a par value of one dollar. There were no shares of serial preferred stock outstanding at
December 31, 2017
and
2016
.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Share-Repurchase Programs
The following table shows the company's share-repurchase programs with activity in the years ended
December 31, 2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month of Board Approval
|
|
Dollar Value Approved for Repurchase
|
|
Dollar Value of Shares Repurchased
|
|
Approximate
Dollar Value of
Shares that May
Yet be
Purchased
Under the
Program
|
|
May 2014
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
|
$
|
—
|
|
|
December 2014
|
|
200,000
|
|
|
200,000
|
|
|
—
|
|
|
September 2015
|
|
400,000
|
|
|
400,000
|
|
|
—
|
|
|
December 2016
|
|
400,000
|
|
|
41,079
|
|
|
358,921
|
|
|
Total
|
|
$
|
1,200,000
|
|
|
$
|
841,079
|
|
|
$
|
358,921
|
|
11. Net Income Per Share
The following table presents the computation of net income per share on a basic and diluted basis for the years ended December 31 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Net income attributable to shareholders
|
|
$
|
401,962
|
|
|
$
|
522,750
|
|
|
$
|
497,726
|
|
|
Weighted-average shares outstanding - basic
|
|
88,681
|
|
|
90,960
|
|
|
94,608
|
|
|
Net effect of various dilutive stock-based compensation awards
|
|
1,085
|
|
|
1,073
|
|
|
1,078
|
|
|
Weighted-average shares outstanding - diluted
|
|
89,766
|
|
|
92,033
|
|
|
95,686
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.53
|
|
|
$
|
5.75
|
|
|
$
|
5.26
|
|
|
Diluted (a)
|
|
$
|
4.48
|
|
|
$
|
5.68
|
|
|
$
|
5.20
|
|
|
|
|
|
(a)
|
Stock-based compensation awards for the issuance of
380
shares,
766
shares, and
658
shares for the years ended
December 31, 2017
,
2016
, and
2015
, respectively, were excluded from the computation of net income per share on a diluted basis as their effect was anti-dilutive.
|
12. Employee Stock Plans
Omnibus Plan
The company maintains the Arrow Electronics, Inc. 2004 Omnibus Incentive Plan (the "Omnibus Plan"), which provides an array of equity alternatives available to the company when designing compensation incentives. The Omnibus Plan permits the grant of cash-based awards, non-qualified stock options, incentive stock options ("ISOs"), stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, covered employee annual incentive awards, and other stock-based awards. The Compensation Committee of the company's Board of Directors (the "Compensation Committee") determines the vesting requirements, termination provision, and the terms of the award for any awards under the Omnibus Plan when such awards are issued.
Under the terms of the Omnibus Plan, a maximum of
19,100,000
shares of common stock may be awarded, inclusive of
5,600,000
shares registered in October 2015. There were
4,896,220
and
5,862,454
shares available for grant under the Omnibus Plan as of
December 31, 2017
and
2016
, respectively. Generally, shares are counted against the authorization only to the extent that they are issued. Restricted stock, restricted stock units, performance shares, and performance units count against the authorization at a rate of 1.69 to 1.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The company recorded, as a component of "Selling, general, and administrative expenses", amortization of stock-based compensation of
$39,122
,
$39,825
, and
$47,274
in
2017
,
2016
, and
2015
, respectively. The actual tax benefit realized from share-based payment awards during
2017
,
2016
, and
2015
was
$18,846
,
$19,745
, and
$16,593
, respectively.
Stock Options
Under the Omnibus Plan, the company may grant both ISOs and non-qualified stock options. ISOs may only be granted to employees of the company, its subsidiaries, and its affiliates. The exercise price for options cannot be less than the fair market value of Arrow's common stock on the date of grant. Options generally vest in equal installments over a four-year period. Options currently outstanding have contractual terms of ten years.
The following information relates to the stock option activity for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted- Average Exercise Price
|
|
Weighted- Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2016
|
1,744,345
|
|
|
$
|
50.72
|
|
|
|
|
|
|
|
|
Granted
|
378,753
|
|
|
|
73.89
|
|
|
|
|
|
|
|
|
Exercised
|
(508,533
|
)
|
|
|
43.65
|
|
|
|
|
|
|
|
|
Forfeited
|
(74,196
|
)
|
|
|
59.24
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
1,540,369
|
|
|
|
58.34
|
|
|
85
|
months
|
|
$
|
33,990
|
|
|
Exercisable at December 31, 2017
|
619,083
|
|
|
$
|
48.95
|
|
|
65
|
months
|
|
$
|
19,477
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the company's closing stock price on the last trading day of
2017
and the exercise price, multiplied by the number of in-the-money options) received by the option holders had all option holders exercised their options on
December 31, 2017
. This amount changes based on the market value of the company's stock.
The total intrinsic value of options exercised during
2017
,
2016
, and
2015
was
$15,320
,
$10,511
, and
$10,400
, respectively.
Cash received from option exercises during
2017
,
2016
, and
2015
was
$22,195
,
$18,967
, and
$14,900
, respectively, and is included within the financing activities section in the company's consolidated statements of cash flows.
The fair value of stock options was estimated using the Black-Scholes valuation model with the following weighted-average assumptions for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Volatility (percent) (a)
|
26
|
|
31
|
|
28
|
|
Expected term (in years) (b)
|
5.1
|
|
5.2
|
|
4.8
|
|
Risk-free interest rate (percent) (c)
|
1.9
|
|
1.3
|
|
1.5
|
|
|
|
|
(a)
|
Volatility is measured using historical daily price changes of the company's common stock over the expected term of the option.
|
|
|
|
|
(b)
|
The expected term represents the weighted-average period the option is expected to be outstanding and is based primarily on the historical exercise behavior of employees.
|
|
|
|
|
(c)
|
The risk-free interest rate is based on the U.S. Treasury zero-coupon yield with a maturity that approximates the expected term of the option.
|
There is no expected dividend yield.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The weighted-average fair value per option granted was
$20.01
,
$16.93
, and
$19.10
during
2017
,
2016
, and
2015
, respectively.
Performance Awards
The Compensation Committee, subject to the terms and conditions of the Omnibus Plan, may grant performance share and/or performance unit awards (collectively "performance awards"). The fair value of a performance award is the fair market value of the company's common stock on the date of grant. Such awards will be earned only if performance goals over performance periods established by or under the direction of the Compensation Committee are met. The performance goals and periods may vary from participant-to-participant, group-to-group, and time-to-time. The performance awards will be delivered in common stock at the end of the service period based on the company's actual performance compared to the target metric and may be from 0% to 185%
of the initial award. Compensation expense is recognized using the graded vesting method over the three-year service period and is adjusted each period based on the current estimate of performance compared to the target metric.
Restricted Stock
Subject to the terms and conditions of the Omnibus Plan, the Compensation Committee may grant shares of restricted stock and/or restricted stock units. Restricted stock units are similar to restricted stock except that no shares are actually awarded to the participant on the date of grant. Shares of restricted stock and/or restricted stock units awarded under the Omnibus Plan may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable period of restriction established by the Compensation Committee and specified in the award agreement (and in the case of restricted stock units until the date of delivery or other payment). Compensation expense is recognized on a straight-line basis as shares become free of forfeiture restrictions (i.e., vest) generally over a four-year period.
Non-Employee Director Awards
The company's Board shall set the amounts and types of equity awards that shall be granted to all non-employee directors on a periodic, nondiscriminatory basis pursuant to the Omnibus Plan, as well as any additional amounts, if any, to be awarded, also on a periodic, nondiscriminatory basis, based on each of the following: the number of committees of the Board on which a non-employee director serves, service of a non-employee director as the chair of a Committee of the Board, service of a non-employee director as Chairman of the Board or Lead Director, or the first selection or appointment of an individual to the Board as a non-employee director. Non-employee directors currently receive annual awards of fully-vested restricted stock units valued at
$130
. All restricted stock units are settled in common stock following the director's separation from the Board.
Unless a non-employee director gives notice setting forth a different percentage, 50% of each director's annual retainer fee is deferred and converted into units based on the fair market value of the company's stock as of the date it was payable. A non-employee director can choose between one-year cliff vesting or keep the deferral until separation from the Board. After separation from the board, the deferral will be converted into a share of company stock and distributed to the non-employee director as soon as practicable following such date.
Summary of Non-Vested Shares
The following information summarizes the changes in non-vested performance shares, performance units, restricted stock, and restricted stock units for
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted- Average Grant Date Fair Value
|
|
Non-vested shares at December 31, 2016
|
1,372,046
|
|
|
$
|
57.04
|
|
|
Granted
|
493,232
|
|
|
|
70.57
|
|
|
Vested
|
(573,617
|
)
|
|
|
56.57
|
|
|
Forfeited
|
(114,696
|
)
|
|
|
60.52
|
|
|
Non-vested shares at December 31, 2017
|
1,176,965
|
|
|
|
62.60
|
|
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The total fair value of shares vested during
2017
,
2016
, and
2015
was
$42,470
,
$52,026
, and
$48,118
, respectively.
As of
December 31, 2017
, there was
$38,018
of total unrecognized compensation cost related to non-vested shares and stock options which is expected to be recognized over a weighted-average period of
2.04
years.
13. Employee Benefit Plans
The company maintains an unfunded Arrow supplemental executive retirement plan ("SERP") under which the company will pay supplemental pension benefits to certain employees upon retirement. As of
December 31, 2017
, there were
10
current and
22
former corporate officers participating in this plan. The Board determines those employees who are eligible to participate in the Arrow SERP.
The Arrow SERP, as amended, provides for the pension benefits to be based on a percentage of average final compensation, based on years of participation in the Arrow SERP. The Arrow SERP permits early retirement, with payments at a reduced rate, based on age and years of service subject to a minimum retirement age of
55
. Participants whose accrued rights under the Arrow SERP, prior to the 2002 amendment, which were adversely affected by the amendment, will continue to be entitled to such greater rights.
Additionally, as part of the company's acquisition of Wyle in 2000, Wyle provided retirement benefits for certain employees under a defined benefit plan. Benefits under this plan were frozen as of December 31, 2000.
In 2016, the company adopted an amendment to its Wyle defined benefit plan that provided eligible plan participants with the option to receive an early distribution of their pension benefits. Lump sum payments of
$26,063
were made during June 2016 and the company incurred a settlement expense of
$12,211
.
In 2017, the company entered into a settlement for a portion of its Wyle defined benefit plan. Participants will receive benefits through an insurance annuity contract. The settlement of
$42,985
was completed during October 2017 and the company incurred a settlement expense of
$16,706
.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The company uses a December 31 measurement date for the Arrow SERP and the Wyle defined benefit plan. Pension information for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrow SERP
|
|
Wyle Defined Benefit Plan
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Accumulated benefit obligation
|
$
|
90,368
|
|
|
$
|
84,561
|
|
|
$
|
60,374
|
|
|
$
|
97,984
|
|
|
Changes in projected benefit obligation:
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
$
|
91,038
|
|
|
$
|
88,729
|
|
|
$
|
97,984
|
|
|
$
|
129,029
|
|
|
Service cost
|
2,310
|
|
|
1,689
|
|
|
—
|
|
|
—
|
|
|
Interest cost
|
3,552
|
|
|
3,475
|
|
|
3,860
|
|
|
4,485
|
|
|
Actuarial loss (gain)
|
4,929
|
|
|
1,021
|
|
|
7,595
|
|
|
(3,244
|
)
|
|
Benefits paid
|
(4,222
|
)
|
|
(3,876
|
)
|
|
(6,080
|
)
|
|
(6,223
|
)
|
|
Settlement
|
—
|
|
|
—
|
|
|
(42,985
|
)
|
|
(26,063
|
)
|
|
Projected benefit obligation at end of year
|
$
|
97,607
|
|
|
$
|
91,038
|
|
|
$
|
60,374
|
|
|
$
|
97,984
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71,470
|
|
|
$
|
101,859
|
|
|
Actual return on plan assets
|
—
|
|
|
—
|
|
|
10,258
|
|
|
1,897
|
|
|
Company contributions
|
—
|
|
|
—
|
|
|
14,000
|
|
|
—
|
|
|
Benefits paid
|
—
|
|
|
—
|
|
|
(6,080
|
)
|
|
(6,223
|
)
|
|
Settlement
|
—
|
|
|
—
|
|
|
(42,985
|
)
|
|
(26,063
|
)
|
|
Fair value of plan assets at end of year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,663
|
|
|
$
|
71,470
|
|
|
Funded status
|
$
|
(97,607
|
)
|
|
$
|
(91,038
|
)
|
|
$
|
(13,711
|
)
|
|
$
|
(26,514
|
)
|
|
Amounts recognized in the company's consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
(4,535
|
)
|
|
$
|
(4,556
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Noncurrent liabilities
|
(93,072
|
)
|
|
(86,482
|
)
|
|
(13,711
|
)
|
|
(26,514
|
)
|
|
Net liabilities at end of year
|
$
|
(97,607
|
)
|
|
$
|
(91,038
|
)
|
|
$
|
(13,711
|
)
|
|
$
|
(26,514
|
)
|
|
Components of net periodic pension cost:
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
2,310
|
|
|
$
|
1,689
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
3,552
|
|
|
3,475
|
|
|
3,860
|
|
|
4,485
|
|
|
Expected return on plan assets
|
—
|
|
|
—
|
|
|
(3,449
|
)
|
|
(5,273
|
)
|
|
Amortization of net loss
|
1,216
|
|
|
3,208
|
|
|
1,666
|
|
|
1,827
|
|
|
Settlement charge
|
—
|
|
|
—
|
|
|
16,706
|
|
|
12,211
|
|
|
Net periodic pension cost
|
$
|
7,078
|
|
|
$
|
8,372
|
|
|
$
|
18,783
|
|
|
$
|
13,250
|
|
|
Weighted-average assumptions used to determine benefit obligation:
|
|
|
|
|
|
|
|
|
Discount rate
|
3.50
|
%
|
|
4.00
|
%
|
|
3.60
|
%
|
|
4.00
|
%
|
|
Rate of compensation increase
|
5.00
|
%
|
|
5.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Expected return on plan assets
|
N/A
|
|
|
N/A
|
|
|
5.25
|
%
|
|
4.75
|
%
|
|
Weighted-average assumptions used to determine net periodic pension cost:
|
|
|
|
|
|
|
|
|
Discount rate
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.25
|
%
|
|
Rate of compensation increase
|
5.00
|
%
|
|
5.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Expected return on plan assets
|
N/A
|
|
|
N/A
|
|
|
4.75
|
%
|
|
6.25
|
%
|
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The amounts reported for net periodic pension cost and the respective benefit obligation amounts are dependent upon the actuarial assumptions used. The company reviews historical trends, future expectations, current market conditions, and external data to determine the assumptions. The discount rate represents the market rate for a high-quality corporate bond. The rate of compensation increase is determined by the company, based upon its long-term plans for such increases. The expected return on plan assets is based on current and expected asset allocations, historical trends, and projected returns on those assets. The actuarial assumptions used to determine the net periodic pension cost are based upon the prior year's assumptions used to determine the benefit obligation.
Benefit payments are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrow SERP
|
|
Wyle Defined Benefit Plan
|
|
2018
|
$
|
4,535
|
|
|
$
|
3,133
|
|
|
2019
|
5,902
|
|
|
3,216
|
|
|
2020
|
5,852
|
|
|
3,232
|
|
|
2021
|
5,797
|
|
|
3,273
|
|
|
2022
|
5,998
|
|
|
3,361
|
|
|
2023-2026
|
32,652
|
|
|
17,207
|
|
The company makes contributions to the Wyle defined benefit plan so that minimum contribution requirements, as determined by government regulations, are met. The company made contributions of
$14,000
in 2017. The company did not make any contributions in
2016
. The company is planning on contributing
$15,000
to the plan in 2018, however, there is no requirement to make any contributions in
2018
. The company has funded $
86,587
of the Arrow SERP obligation for the former corporate officers in a rabbi trust comprised primarily of life insurance policies and mutual fund assets.
The fair values of the company's pension plan assets for the Wyle defined benefit plan at
December 31, 2017
, utilizing the fair value hierarchy discussed in Note 7, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Equities
:
|
|
|
|
|
|
|
|
|
U.S. common stocks
|
$
|
17,039
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,039
|
|
|
International mutual funds
|
6,975
|
|
|
—
|
|
|
—
|
|
|
6,975
|
|
|
Index mutual funds
|
2,942
|
|
|
—
|
|
|
—
|
|
|
2,942
|
|
|
Fixed Income
:
|
|
|
|
|
|
|
|
|
Mutual funds
|
19,707
|
|
|
—
|
|
|
—
|
|
|
19,707
|
|
|
Total
|
$
|
46,663
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,663
|
|
The fair values of the company's pension plan assets for the Wyle defined benefit plan at
December 31, 2016
, utilizing the fair value hierarchy discussed in Note 7, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Equities
:
|
|
|
|
|
|
|
|
|
U.S. common stocks
|
$
|
29,020
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29,020
|
|
|
International mutual funds
|
10,791
|
|
|
—
|
|
|
—
|
|
|
10,791
|
|
|
Index mutual funds
|
8,501
|
|
|
—
|
|
|
—
|
|
|
8,501
|
|
|
Fixed Income
:
|
|
|
|
|
|
|
|
|
Mutual funds
|
21,047
|
|
|
—
|
|
|
—
|
|
|
21,047
|
|
|
Insurance contracts
|
—
|
|
|
2,111
|
|
|
—
|
|
|
2,111
|
|
|
Total
|
$
|
69,359
|
|
|
$
|
2,111
|
|
|
$
|
—
|
|
|
$
|
71,470
|
|
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The investment portfolio contains a diversified blend of common stocks, bonds, cash equivalents, and other investments, which may reflect varying rates of return. The company accounts for common stock and mutual fund investments at fair value, using quoted market prices. The investments are further diversified within each asset classification. The portfolio diversification provides protection against a single security or class of securities having a disproportionate impact on aggregate performance. The long-term target allocations for plan assets are
58%
in equities and
42%
in fixed income, although the actual plan asset allocations may be within a range around these targets. The actual asset allocations are reviewed and rebalanced on a periodic basis to maintain the target allocations.
Comprehensive Income Items
In
2017
,
2016
, and
2015
, actuarial losses of
$3,795
,
$740
, and
$185
, respectively, were recognized in comprehensive income, net of related taxes, related to the company's defined benefit plans. In
2017
,
2016
, and
2015
, a reclassification adjustment of comprehensive income was recognized, net of related taxes, as a result of being recognized in net periodic pension cost for an actuarial loss of
$12,070
,
$10,625
, and
$3,282
, respectively.
Accumulated other comprehensive income (loss) at December 31,
2017
and
2016
includes unrecognized actuarial losses, net of related taxes, of
$28,569
and
$36,841
, respectively, that have not yet been recognized in net periodic pension cost.
The actuarial loss included in accumulated other comprehensive income (loss), net of related taxes, which is expected to be recognized in net periodic pension cost is
$1,439
as of December 31,
2018
.
Defined Contribution Plan
The company has defined contribution plans for eligible employees, which qualify under Section 401(k) of the Internal Revenue Code. The company's contribution to the plans, which are based on a specified percentage of employee contributions, amounted to
$13,627
,
$13,432
, and
$13,604
in
2017
,
2016
, and
2015
, respectively. The company made discretionary contributions to the company's defined benefit 401(k) plan, which amounted to
$7,574
,
$7,572
, and
$7,151
in
2017
,
2016
, and
2015
, respectively. Certain international subsidiaries maintain separate defined contribution plans for their employees and made contributions thereunder, which amounted to
$18,815
,
$12,882
, and
$11,465
in
2017
,
2016
, and
2015
, respectively.
14. Lease Commitments
The company leases certain office, distribution, and other property under non-cancelable operating leases expiring at various dates through
2033
. Rental expense under non-cancelable operating leases, net of sublease income, amounted to
$83,636
,
$78,521
, and
$77,405
in
2017
,
2016
, and
2015
, respectively.
Aggregate minimum rental commitments under all non-cancelable operating leases, exclusive of real estate taxes, insurance, and leases related to facilities closed as a result of the integration of acquired businesses and the restructuring of the company, are as follows:
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
75,058
|
|
|
2019
|
|
64,397
|
|
|
2020
|
|
49,616
|
|
|
2021
|
|
37,157
|
|
|
2022
|
|
27,964
|
|
|
Thereafter
|
|
135,079
|
|
15. Contingencies
Environmental Matters
In connection with the purchase of Wyle in August 2000, the company acquired certain of the then outstanding obligations of Wyle, including Wyle's indemnification obligations to the purchasers of its Wyle Laboratories division for environmental clean-up costs associated with any then existing contamination or violation of environmental regulations. Under the terms of the
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
company's purchase of Wyle from the sellers, the sellers agreed to indemnify the company for certain costs associated with the Wyle environmental obligations, among other things. In 2012, the company entered into a settlement agreement with the sellers pursuant to which the sellers paid
$110,000
and the company released the sellers from their indemnification obligation. As part of the settlement agreement the company accepted responsibility for any potential subsequent costs incurred related to the Wyle matters. The company is aware of two Wyle Laboratories facilities (in Huntsville, Alabama and Norco, California) at which contaminated groundwater was identified and will require environmental remediation. In addition, the company was named as a defendant in several lawsuits related to the Norco facility and a third site in El Segundo, California which have now been settled to the satisfaction of the parties.
The company expects these environmental liabilities to be resolved over an extended period of time. Costs are recorded for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accruals for environmental liabilities are adjusted periodically as facts and circumstances change, assessment and remediation efforts progress, or as additional technical or legal information becomes available. Environmental liabilities are difficult to assess and estimate due to various unknown factors such as the timing and extent of remediation, improvements in remediation technologies, and the extent to which environmental laws and regulations may change in the future. Accordingly, the company cannot presently fully estimate the ultimate potential costs related to these sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed and, in some instances, implemented. To the extent that future environmental costs exceed amounts currently accrued by the company, net income would be adversely impacted and such impact could be material.
Accruals for environmental liabilities are included in "Accrued expenses" and "Other liabilities" in the company's consolidated balance sheets. The company has determined that there is no amount within the environmental liability range that is a better estimate than any other amount, and therefore has recorded the accruals at the minimum amount of the ranges.
As successor-in-interest to Wyle, the company is the beneficiary of various Wyle insurance policies that covered liabilities arising out of operations at Norco and Huntsville. To date, the company has recovered approximately
$37,000
from certain insurance carriers relating to environmental clean-up matters at the Norco site. The company is considering the best way to pursue its potential claims against insurers regarding liabilities arising out of operations at Huntsville. The resolution of these matters will likely take several years. The company has not recorded a receivable for any potential future insurance recoveries related to the Norco and Huntsville environmental matters, as the realization of the claims for recovery are not deemed probable at this time.
The company believes the settlement amount together with potential recoveries from various insurance policies covering environmental remediation and related litigation will be sufficient to cover any potential future costs related to the Wyle acquisition; however, it is possible unexpected costs beyond those anticipated could occur.
Environmental Matters - Huntsville
In February 2015, the company and the Alabama Department of Environmental Management ("ADEM") finalized and executed a consent decree in connection with the Huntsville, Alabama site. Characterization of the extent of contaminated soil and groundwater continues at the site. Under the direction of the ADEM, approximately
$6,000
was spent to date. The pace of the ongoing remedial investigations, project management, and regulatory oversight is likely to increase somewhat and though the complete scope of the activities is not yet known, the company currently estimates additional investigative and related expenditures at the site of approximately
$200
to
$400
. The nature and scope of both feasibility studies and subsequent remediation at the site has not yet been determined, but assuming the outcome includes source control and certain other measures, the cost is estimated to be between
$4,500
and
$10,000
.
Despite the amount of work undertaken and planned to date, the company is unable to estimate any potential costs in addition to those discussed above because the complete scope of the work is not yet known, and, accordingly, the associated costs have yet to be determined.
Environmental Matters - Norco
In October 2003, the company entered into a consent decree with Wyle Laboratories and the California Department of Toxic Substance Control ("DTSC") in connection with the Norco site. In April 2005, a Remedial Investigation Work Plan was approved by DTSC that provided for site-wide characterization of known and potential environmental issues. Investigations performed in connection with this work plan and a series of subsequent technical memoranda continued until the filing of a final Remedial
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Investigation Report early in 2008. Work is under way pertaining to the remediation of contaminated groundwater at certain areas on the Norco site and of soil gas in a limited area immediately adjacent to the site. In 2008, a hydraulic containment system was installed to capture and treat groundwater before it moves into the adjacent offsite area. In September 2013, the DTSC approved the final Remedial Action Plan ("RAP") and work is currently progressing under the RAP. The approval of the RAP includes the potential for additional remediation action after the five year review of the hydraulic containment system if the review finds that contaminants have not been sufficiently reduced in the offsite area.
Approximately
$56,000
was spent to date on remediation, project management, regulatory oversight, and investigative and feasibility study activities. The company currently estimates that these activities will give rise to an additional
$18,500
to
$29,000
. Project management and regulatory oversight include costs incurred by project consultants for project management and costs billed by DTSC to provide regulatory oversight.
Despite the amount of work undertaken and planned to date, the company is unable to estimate any potential costs in addition to those discussed above because the complete scope of the work under the RAP is not yet known, and, accordingly, the associated costs have yet to be determined.
Other
From time to time, in the normal course of business, the company may become liable with respect to other pending and threatened litigation, environmental, regulatory, labor, product, and tax matters. While such matters are subject to inherent uncertainties, it is not currently anticipated that any such matters will materially impact the company's consolidated financial position, liquidity, or results of operations.
16. Segment and Geographic Information
The company is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company distributes electronic components to original equipment manufacturers and contract manufacturers through its global components business segment and provides enterprise computing solutions to value-added resellers through its global ECS business segment. As a result of the company's philosophy of maximizing operating efficiencies through the centralization of certain functions, selected fixed assets and related depreciation, as well as borrowings, are not directly attributable to the individual operating segments and are included in the corporate business segment.
Sales and operating income (loss), by segment, for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Sales:
|
|
|
|
|
|
|
Global components
|
$
|
18,330,456
|
|
|
$
|
15,408,839
|
|
|
$
|
14,405,793
|
|
|
Global ECS
|
8,482,052
|
|
|
8,416,422
|
|
|
8,876,227
|
|
|
Consolidated
|
$
|
26,812,508
|
|
|
$
|
23,825,261
|
|
|
$
|
23,282,020
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Global components
|
$
|
801,027
|
|
|
$
|
686,466
|
|
|
$
|
649,396
|
|
|
Global ECS
|
445,081
|
|
|
441,803
|
|
|
424,063
|
|
|
Corporate (a)
|
(317,658
|
)
|
|
(269,730
|
)
|
|
(248,977
|
)
|
|
Consolidated
|
$
|
928,450
|
|
|
$
|
858,539
|
|
|
$
|
824,482
|
|
|
|
|
|
(a)
|
Includes restructuring, integration, and other charges of
$91,294
,
$73,602
, and
$68,765
in
2017
,
2016
, and
2015
, respectively, as well as an impairment on assets held for sale of
$21,000
in 2017.
|
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Total assets, by segment, at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Global components
|
|
$
|
10,229,168
|
|
|
$
|
8,360,926
|
|
|
Global ECS
|
|
5,430,217
|
|
|
5,053,172
|
|
|
Corporate
|
|
803,424
|
|
|
792,268
|
|
|
Consolidated
|
|
$
|
16,462,809
|
|
|
$
|
14,206,366
|
|
Sales, by geographic area, for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Americas (b)
|
|
$
|
12,408,383
|
|
|
$
|
11,442,690
|
|
|
$
|
11,721,528
|
|
|
EMEA
|
|
7,673,348
|
|
|
6,772,685
|
|
|
6,788,738
|
|
|
Asia/Pacific
|
|
6,730,777
|
|
|
5,609,886
|
|
|
4,771,754
|
|
|
Consolidated
|
|
$
|
26,812,508
|
|
|
$
|
23,825,261
|
|
|
$
|
23,282,020
|
|
|
|
|
|
(b)
|
Includes sales related to the United States of
$11,321,917
,
$10,501,131
, and
$10,761,932
in
2017
,
2016
, and
2015
, respectively.
|
Net property, plant, and equipment, by geographic area, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Americas (c)
|
|
$
|
688,637
|
|
|
$
|
631,386
|
|
|
EMEA
|
|
108,232
|
|
|
90,834
|
|
|
Asia/Pacific
|
|
41,606
|
|
|
34,079
|
|
|
Consolidated
|
|
$
|
838,475
|
|
|
$
|
756,299
|
|
|
|
|
|
(c)
|
Includes net property, plant, and equipment related to the United States of
$683,988
and
$626,964
at
December 31, 2017
and
2016
, respectively.
|
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
17. Quarterly Financial Data (Unaudited)
The company operates on a quarterly calendar that closes on the Saturday closest to the end of the calendar quarter.
A summary of the company's consolidated quarterly results of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter (b)
|
|
Third Quarter
|
|
Fourth Quarter (c)
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
5,759,552
|
|
|
$
|
6,465,346
|
|
|
$
|
6,953,740
|
|
|
$
|
7,633,870
|
|
|
|
Gross profit
|
|
|
759,887
|
|
|
|
823,966
|
|
|
|
843,358
|
|
|
|
930,128
|
|
|
|
Operating income
|
|
|
191,722
|
|
|
|
229,822
|
|
|
|
235,992
|
|
|
|
270,914
|
|
|
|
Net income attributable to shareholders
|
|
|
113,768
|
|
|
|
99,679
|
|
|
|
134,630
|
|
|
|
53,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.27
|
|
|
$
|
1.12
|
|
|
$
|
1.52
|
|
|
$
|
0.61
|
|
|
|
Diluted
|
|
$
|
1.26
|
|
|
$
|
1.11
|
|
|
$
|
1.50
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
5,474,177
|
|
|
$
|
5,972,101
|
|
|
$
|
5,936,092
|
|
|
$
|
6,442,891
|
|
|
|
Gross profit
|
|
|
748,898
|
|
|
|
798,791
|
|
|
|
773,162
|
|
|
|
823,348
|
|
|
|
Operating income
|
|
|
181,364
|
|
|
|
223,592
|
|
|
|
198,684
|
|
|
|
254,899
|
|
|
|
Net income attributable to shareholders
|
|
|
106,235
|
|
|
|
134,270
|
|
|
|
117,727
|
|
|
|
164,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.16
|
|
|
$
|
1.46
|
|
|
$
|
1.29
|
|
|
$
|
1.84
|
|
|
|
Diluted
|
|
$
|
1.14
|
|
|
$
|
1.45
|
|
|
$
|
1.28
|
|
|
$
|
1.81
|
|
|
|
|
|
|
(a)
|
Quarterly net income per share is calculated using the weighted-average shares outstanding during each quarterly period, while net income per share for the full year is calculated using the weighted-average shares outstanding during the year. Therefore, the sum of the net income per share for each of the four quarters may not equal the net income per share for the full year.
|
|
|
|
|
(b)
|
Net income attributable to shareholders includes a loss on extinguishment of debt of
$58.8 million
during the second quarter of 2017
|
|
|
|
|
(c)
|
Net income attributable to shareholders includes a U.S. Tax Act expense of
$124.7 million
during the fourth quarter of 2017.
|
18. Assets Held for Sale
During fiscal year 2017, the company took actions to actively market a non-strategic business. The sale is expected to close within one year. Total assets of
$109,000
and total liabilities of
$76,000
have not been reclassified as held for sale on the consolidated balance sheet given the immaterial nature of the business. The company recorded a pre-tax impairment charge of
$21,000
to write-down the assets held for sale to the fair value less cost to sell, inclusive of a
$7,922
,
$9,660
, and
$3,418
impairment of goodwill, intangibles, and property, plant, and equipment respectively. Pre-tax profit of the business held for sale was not material for the years ended December 31, 2017, 2016, and 2015, respectively.
ARROW ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
19. Subsequent Events
In January 2018, the company acquired eInfochips for a purchase price of approximately
$318,000
. eInfochips services customers at every phase of technology deployment, including custom hardware and software, and new Internet of Things based business models. eInfochips will be recorded in the company's global components business segment.
In January 2018, the company acquired Commtech for a purchase price of approximately
$22,000
. Commtech is a value-added distributor of enterprise computing solutions.